Rejoinder to Eerlijke Handel on Fair Trade or Free Trade

This is a rejoinder to Eerlijke Handel's response to my post Fair Trade or Free Trade: An Economic Analysis.

Eerlijke,

Thank you for your thoughtful questions.  Following your style, your questions are in italics and my responses are beneath them.

What is your definition of coerced?

It is where one party does not consent voluntarily; the trade only takes place because of a threat of violence. For example, if I say “I’ll give you $10 for your tie... take it your leave it” and you agree to these terms, then it is a voluntary trade. If I say “I’ll give you $10 for your tie... or else I will stab you” then it is not a voluntary trade. You might hand over the tie, but only because of the threat of violence, so it is a coerced trade.

Is taking away the only option, the right to food (the only energy input that gives us more time and options) coercion?

There is no “right to food”, per se. Everyone has the right to be free from being coerced by others. This is called the Non-Aggression Principle (NAP) which is the basis of libertarianism. If one person literally has a “right to food” this would mean that someone else has a duty to provide him with food, and this would be a violation of the NAP: coercion against the person providing food. No matter how important food is, no one has the right to initiate coercion to get it.

What is the difference with slavery?

Slavery is a relationship between two individuals, characterized by one individual (the slave-master) continually initiating coercive trades with another individual (the slave). The most common example of a master-slave relationship is that between governments and taxpayers. People only pay taxes because the government threatens them with prison if they don’t pay, so it is clearly a coercive exchange.

Do you believe that an unequal position of power (options) might lead to misuse of power and abuse?

I am a libertarian and hence I oppose all initiations of coercion, especially those that are continual, i.e. master-slave relationships. This means I oppose all taxation and all government regulations, price controls, prohibitions, etc. Abuse of power is what governments and privileged firms do.  If no one is allowed to initiate coercion, no one has any real "power" over anyone else; everyone is only allowed to trade on a voluntary basis.  All governmental actions are abuse of power, because that power is illegitimate.

And how does this differ from your position on monopolies?

The only coherent definition of monopoly is the definition used by economists of the Austrian School, which is: a grant of legal privilege from a government to an individual or firm to be the sole producer of a certain good or service. If a firm has a monopoly, that means the government will initiate coercion on it’s behalf against any other firm that emerges to compete with it. My opposition to initiations of coercion implies that I am opposed to all monopolies, using this Austrian definition.

Do you share my view that a free trade between equal parties is fair, a trade between two parties where one has no other options cannot be called free, nor fair?

Not exactly. Trade with no underlying threat of violence is free by definition, regardless of how “equal” the two parties are, in terms of bargaining power. Whether any given trade is fair is an arbitrary and subjective opinion of a third-party. A trade being free implies that the parties to the trade think it is fair, because it does not make sense to say that a person would voluntarily agree to an exchange he thought was unfair.

If one party has “no other options” because there is an underlying threat of violence, then it is clearly not free or fair. Like if I say “work in my factory… or else I’ll kill you” that’s not free or fair. But if I say “work in my factory… if you want”, even if you will die (maybe from starvation) if you don’t make the trade, then it is both free and fair, because it’s voluntary, and is actually a life-saving trade. And if I decide to close my factory, that is up to me, and not unfair. It is unfortunate for my employees, but I am not treating them unfairly. What would be unfair is if someone threatened me with violence to coerce me into keeping my factory open. But in general, I see no use for the terms fair and unfair when discussing trades; the most important distinction here is between free (voluntary) and unfree (coerced).

In what way is the premium different from the premium that a branded product carries over an identical unbranded product? Do you characterize branding as a charitable donation to the owner of the brand?

Great question. You are right that the economic effects of buying Fairtrade products are similar to the economic effects of paying extra for a product because Tiger Woods promotes it. If one shoe costs $30 and an otherwise identical shoe which Tiger has endorsed costs $50, then yes, the $20 difference could be considered charity. At least, the economic effects would be the same; we would all better off if everyone bought the cheaper shoe rather than paying extra for the brand.

However, I would not call that charity. The person buying the $50 shoes does not do so because they want to make a donation to Tiger. If someone argued that I should buy Tiger Woods’ brand of shoes because it will help Tiger, I would point out that I could help Tiger more by buying the cheaper shoes and directly sending $20 to him. So in essence it’s the same thing, but the intent of the consumer is different. People generally buy expensive shoes because they think they’re “cool”, but people generally buy Fairtrade because they think by doing so they are helping poor people.

I hope the above answers the rest of your questions about branding as well. Just to be clear: I am not suggesting using violence (like a government law) to prevent Fairtrade from operating or people from buying whatever they want. I am merely pointing out that it doesn’t achieve the goal of helping poor people in the way that people think it does when they decide to buy Fairtrade.

Does free trade compete with fair trade and donations?... Why do you only single out one part of the whole as being equal?

This is a technique often used in economics (actually all science). To analyze the effects of something, we keep everything else constant then just consider what the differences are in the effects. Suppose someone earns $500 a month, spends $300 on consumption (living costs), saves $150 a month, and donates $50 per month to Oxfam. Now suppose this person becomes convinced that buying Fairtrade products is a good idea because it helps poor people. The extra cost of buying Fairtrade products is $30 a month, say. This person must decide how they are going to pay for this. They could either: 1) decrease their savings by $30, 2) decrease their consumption by $30, or 3) decrease their Oxfam donation by $30 (or some combination of these).

If he goes with (3), the total amount of charity has not changed, but it is now being delivered less efficiently, because Oxfam is more efficient than Fairtrade. If he goes with either (1) or (2) then he has decided to change other preferences: either his savings rate, or his standard of living. In economics, we keep these things constant because we are trying to isolate the effects of deciding to buy Fairtrade products. If Fairtrade advocates are able to persuade someone to save less, or decrease their standard of living, so that they give more to charity, then all well and good. But then if they’ve made that decision, why not give that extra charity money to Oxfam or some other direct charity?

Do the Ethiopians suffer if Nike produces in Mexico?

Yes, if Nike decided to build their factory in Mexico instead of Ethiopia. If Nike has to pay the same wages in both countries because consumers want Fairtrade certified goods, the incentive to invest in Ethiopia is removed. On the other hand, if consumers bought without consideration for factory workers’ wages, Nike would be more attracted to Ethiopia, because it will be able to employ Ethiopians cheaper than it can employ Mexicans. Thus the virtuous effect of competition will direct investment into Ethiopia, raise wage rates, and bring them out of poverty.

"Landowners and capitalists benefit more than workers in most cases." Can you explain why this is?

This is actually a result of the particular limitations of the Fairtrade organization. While many of the requirements for Fairtrade certification are strictly enforced, minimum pay for workers is often not enforced, and in these cases the landowners benefit more than the workers. To read more about this, see Colleen Berndt: Is Fair Trade in Coffee Production Fair and Useful?

Note that I have since removed this paragraph from my post, because it is quite out of place: it is the only ill-effect I mention that is due to the particular limitaions of Fairtrade, rather than general principle of Fair Trade.

The theory is sound, but do you know how much of our trade is really free

Yes: not much of it unfortunately! Theft, robbery, fraud, etc are widespread. The biggest perpetrators are not common criminals or even organized gangs like the mafia: the biggest gang of thieves is the government.

do you know about our cotton and ethanol industries.

A little. Those industries are heavily intervened with by governments, with regulations, subsidies, quotas, etc. Shame that they are not free.

Do you know how NASA and the military is funded, do you know about the business spin-offs from that?

By taxation. And the military-space-industrial complex is an abomination, full of corruption, as industries run by governments tend to be. Naturally I support the voluntary funding of security and space exploration firms.

What is your view on “wealth begets wealth” and first-mover-advantage?

The only ways for an individual to get rich are 1) to produce something of value to sell, or 2) to steal using threats of violence. So in a free market - where (2) is not allowed - the only way to gain wealth is to add value and by doing so, enrich others as well as yourself. The advantages of being a “first-mover” incentivize and reward innovation, alertness and risk-taking. But as soon as competitors emerge, the only way to keep the wealth coming in is to continue to innovate and be more efficient than your competitors. So wealth doesn’t beget wealth: successful entrepreneurship begets wealth.

Does fair competition require a level playing field?

It only requires government to get out of the way.

How do you deal with option-poor-people?

Give them more options: remove governmental restrictions, and donate to direct charities that help poor people to help themselves. Certainly don’t take options away from them.

Which one would you give more priority: aiming our arrows at lowering our (coerced) trade protection or at attacking (voluntary) fair trade?

Definitely the first one! Almost every other post on my blog is "firing arrows" at coercive trades. Just on this one issue of Fair Trade I felt the need to point out a common misconception.

I hope this addresses all your points. I skipped over some questions because I would largely be repeating myself. If I have missed anything substantial, let me know. Thank you for your questions.